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16% excise is a regressive policy

Sukumar Mukhopadhyay

The draft report of the Task Force headed by Vijay Kelkar has been able to put together many good proposals on Customs, excise and the Value Added Tax.

The emphasis on Customs and central excise has been to unburden the tariffs from the numerous exemptions, conditions and lists to which they are subject.

On the excise front, the clear indication is to converge all rates to a single rate of 16 per cent.

The 32 per cent rate will slide down and the rate of zero per cent will go up to 16 per cent. (However, some items will continue to attract a zero per cent rate.)

It is also proposed to abolish the distinction between capital goods and inputs. However, there are many deficiencies in the report as discussed below:

The principle of having only two rates of 20 per cent and 10 per cent by 2004-5 has not been reflected in the Annexure-A which has been made avowedly to chart the roadmap.

Annexure-A shows several rates - 3 per cent, 5 per cent, 10 per cent, 15 per cent, 20 per cent, 25 per cent, 40 per cent - apart from the higher rates. Several avoidable exemptions are also there.

So it is not clear how the goal will be reached. The idea of clearance of cargo without physical examination is laudable, but limiting it to only importers with a good track record will defeat the purpose.

There are cases against such a large number of companies that identifying the ones with a good track record will leave almost 50 per cent of big importers out of reckoning.

Actually, it is not necessary to see the track record since no important case has been detected merely by physically examining goods. All have been detected on the basis of intelligence.

What is necessary is to pass goods without physical checking but concentrate on collection of intelligence and post-import check of valuation. Too much caution, as suggested now, will never yield results.

Bringing the 32 per cent excise duty down by 4 percentage points every year to make it eventually 16 per cent is, in my view, a regressive policy.

The consumption tax is basically a regressive tax since the rich and the poor pay the same level of tax.

To make it more progressive, it is necessary to have a higher level of tax for goods of conspicuous consumption such as cars, air-conditioners and demerit goods such as pan masala and cigarettes.

These goods do not enter into any production process because they are clearly final goods.

If the rich pay higher consumption taxes, the burden on the poor will be less and the revenue shortage, so chronic in our economy, will be eased.

So the rates should be 8 per cent (transitional), 16 per cent and 32 per cent ultimately, rather than 8 per cent and 16 per cent.

The Task Force was given a very good suggestion of introducing the system of Advance Ruling.

That would have eliminated the uncertainty among taxpayers. But that has not been accepted.

On the other hand, what has been suggested is that we should have an Ombudsman and that adjudication of offences should be done not by one Commissioner but by two or, in the case of a difference of opinion, three. So new posts galore, both for those in service and also for the retired.

Part II: Corporate tax rates must be brought down to 25%

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